Working Paper: CEPR ID: DP7847
Authors: Pierre Dubois; Sandra J. Darrosell
Abstract: We develop a model of competition between retailer chains with a structural estimation of the demand and supply in the supermarket industry in France. In the model, supermarkets compete in price and brand offer over all food products to attract consumers, in particular through the share of private labels versus national brands across all their products. Private labels can serve as a differentiation tool for the retailers in order to soften price competition. They may affect the marginal costs of all products for the retailer because of eventual quality differences and also by helping retailers to obtain better conditions from their manufacturers. Differentiation is taken into account by estimating a discrete-continuous choice model of demand where outlet choice and total expenditures are determined endogenously. On the supply side, we consider a simultaneous competition game in brand offer and price between retailers to identify marginal costs. After estimation by simulated maximum likelihood, the structural estimates allow to simulate the effect on the equilibrium behavior of retailer chains of a demand shock through an increase in transportation costs for consumers and a merger between two retailer chains.
Keywords: competition; discrete-continuous choice; retailing; structural estimation
JEL Codes: L13; L22; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private labels (L67) | differentiation tool for retailers (L15) |
| private labels (L67) | soften price competition (L13) |
| private labels (L67) | marginal costs (D40) |
| private labels (L67) | consumer loyalty (L15) |
| private labels (L67) | retailers' bargaining power (L81) |
| retailers' bargaining power (L81) | pricing strategies of national brands (L11) |
| private labels (L67) | wholesale prices (L42) |
| lower wholesale prices (L11) | double marginalization problem (J79) |
| reduce double marginalization problem (C34) | consumer surplus (D46) |